Posts Tagged ‘taxes’

The other day, Levitt and I participated in a brainstorming session on how to fight childhood obesity, sponsored by the Robert Wood Johnson Foundation. (FWIW, we recorded the event and will try to turn it into a podcast.)

One topic that got a lot of traction was a targeted tax on sugary drinks and fatty foods. (This is often called a "fat tax" but should not be confused with a tax on overweight people.) Many people in the session were in favor of the idea but a few were skeptical, primarily because such a tax will be tricky to implement well. One objection that I was surprised no one raised: the simple fact that taxpayers might hate the tax and rebel against it to the point where it becomes politically and economically impossible.

If there is one thing that politicians love to do it's to promise people things now and not worry about how we will pay for those promises until sometime far into the future, when some other politician is on the hook to balance the budget.

We see this all the time in the form of budget deficits in the federal government, and also with the accounting tricks used on the Social Security Trust Fund.

These sorts of shenanigans get less press at the state and local level because many state and local governments are required to have balanced budgets (this paper by my thesis adviser Jim Poterba lays out some of the details). There are, of course, ways for states to get around the balanced-budget provisions. The method that currently casts the greatest shadow over the future is underfunded pensions. State governments promise generous retirement packages to state employees, but use accounting tricks to avoid recognizing the full value of what taxpayers will owe in the future to cover those debts.

1. Poll tax. Everyone pays the same amount. What could be fairer than this?!England tried it in the late 14th century, leading in 1381 to Wat Tyler's Rebellion. Six hundred years later, England tried it again, leading to the Poll Tax Riots.

2. Sales tax. Goods are taxed at a flat rate (often 17 to 20 percent in Europe, and 5 to 8 percent in various American jurisdictions). Because the wealthy spend a smaller fraction of their income on taxable goods than do the poor, this tax is less progressive than a flat income tax.

3. Flat income tax. Everyone pays the same fraction of his or her income. This tax was the core of Steve Forbes’s platform when he ran for president in 1996 and 2000.

Dividends in the U.S. are taxed at only 15 percent (much lower than wages/salaries). The argument is that since corporate profits, from which dividends are paid, are already taxed, taxing dividends is double taxation. But what about capital gains—why are they taxed at 15 percent too? The standard argument is that we should be taxing real capital gains, not nominal gains. Okay, but it would be easy to include the Consumer Price Index for each of many years in TurboTax or TaxCut, base taxes on real gains and tax the real gain at the same rate as wages. The administrative cost of calculating real gains has disappeared. Another argument for a lower tax on capital gains might be that investment/risk-taking is more responsive to net returns than is labor supply, justifying a lower tax rate as optimal taxation. Perhaps, but at best the evidence is scarce. My guess is that the real justification is the ability of wealthy people, who are the main beneficiaries of this tax giveaway, to get Congress to enhance their net incomes. (HT: PLM).

We believe this is because marriage provides an implicit social insurance since the spouses are able to share their income. However, if divorce rates are higher in a society, women have a higher incentive to obtain work experience in case they find themselves alone in the future. The reason the incentive is higher is because in our data, women happen to be the second earner in the household more often than men. European women anticipate not getting divorced as often and hence find less reason to insure themselves by working as much as American women.

Chakraborty and Holter use U.S data to run a model testing their theory; their findings are interesting:

Chances are, you’re going to spend tonight finalizing your taxes, making sure that you ferret every last deduction. And probably pretty pleased to be getting these deductions; but when you dig in a bit deeper, you may not be so sure — at least that’s what Betsey Stevenson and I argue in our latest column.

In fact, tax breaks are no different from either government handouts, or federal mandates, whether evaluated in terms of your finances, the government’s finances, or incentives:

Instead of looking at all the breaks for mortgage interest, health care, retirement savings and so on as deductions, picture the government writing you a check for each item. This equivalence between tax deductions and government spending leads economists to call them “tax expenditures.” Reformers have hit on an even more pointed description: spending through the tax code.

Philip J. Cook and Christine Piette Durrance have published a working paper called "The Virtuous Tax: Lifesaving and Crime-Prevention Effects of the 1991 Federal Alcohol-Tax Increase." It makes a substantial argument for the upside of higher alcohol taxes:

On January 1, 1991, the federal excise tax on beer doubled, and the tax rates on wine and liquor increased as well. ... We demonstrate that the relative importance of drinking in traffic fatalities is closely tied to per capita alcohol consumption across states. As a result, we expect that the proportional effects of the federal tax increase on traffic fatalities would be positively correlated with per capita consumption.

Are ransoms paid to pirates tax deductible? The question actually makes sense to me. If we can pay medical insurance and dependent care pre-tax, we should be able to deduct the ransoms (typically a substantial sum) paid to save our relatives/dependents.

According to the IRS, the answer is yes, since ransom qualifies as theft, along with blackmail, embezzlement, and extortion. You must, however, show proof of your loss. So make sure to get a receipt, or file a police report. A recent court order in India also allows for tax deduction on ransom. This has some lawmakers worrying about a potential unintended consequence: a spike in fake kidnappings.

Last Monday, Aaron Edlin and I published a cri de coeur op-ed in the New York Times calling for a Brandeis tax, an automatic tax that would put the brakes on income inequality. This is the third in a series of posts (the first and second posts are here and here) explaining more about our rationale and providing more details on how a Brandeis tax might be implemented. You can also listen to my hour-long interview on Connecticut Public Radio’s “Where we Live” here.

Of Lags and Caps: More Details About Possible Implementations of a Brandeis TaxBy Ian Ayres & Aaron Edlin

Remarkably of the hundreds of emails we received in reaction to our op-ed, almost no one questioned Brandeis’s idea that we can have great concentrations of wealth, or democracy but not both. People questioned other aspects of our proposal, asking questions like (1) how would it work in a world of income bunching; (2) would people still have the incentive to work hard; and (2) is it fair to have very high tax rates on the affluent.

Our last post talked about alternative potential triggers. Here we tackle some more detailed questions about implementation including how to trade off different kinds of distortions.